Operations

Hurricane Harvey Could Create 1M Salvage Vehicles

August 31, 2017
• by Gregory Arroyo

Photo courtesy of U.S. Coast Guard.

While market watchers agree that Hurricane Harvey's impact stretches beyond Houston-area automotive business, estimates on exactly how many vehicles will need to be replaced vary between half a million and a million vehicles, including as many as 18,500 fleet vehicles.

Earlier this week, Cox Automotive Chief Economist Jonathan Smoke estimated that the storm, which made landfall along the southeast coastline of Texas on Aug. 25, took out a half a million vehicles. Smoke told Automotive Fleet, commercial, government, and rental fleet losses could be between 11,000 and 18,500.

On Thursday, Black Book analysts said the total loss could be as a high as a million cars, trucks, and SUVs.

"Black Book expects the impact of the hurricane to have far-reaching effects, not only on Houston-Area automotive businesses, such as dealerships and wholesale auctions, but also throughout the South and Midwest," the company said on Thursday, noting that early reports put the number of dealership impacted in the Greater Houston area at more than 500 stores. "Somewhere between 500,000 and a million vehicles will have to be replaced in the area. We believe there is enough new inventory in the U.S. to supply the consumers' needs and the timing may actually be good with new-car stores looking to deplete the 2017 models at model-year changeover."

Forecasts remain fluid, however, with Harvey coming ashore near the Texas-Louisiana border on Wednesday after swinging out into the Gulf of Mexico. AccuWeather called the storm "the costliest and worst natural disaster in American history," and estimated its impact on the nation's gross domestic product to be $190 billion. The GDP currently stands at $19 trillion.

With Texas being the auto industry's second largest market behind California — the state accounting for 14% of U.S. truck sales — Black Book said the market should be strong for both new and used vehicles, especially pickup trucks and SUVs, in the coming month as residents in the affected areas begin replacing damaged vehicles.

The new-vehicle seasonally adjusted annual rate (SAAR), which has been on the decline this year, should also see a lift.

"Online buying will be a significant ingredient in the dealers' ability to source vehicles since they don't have a local option," Black Book said. "The inventory will come from many other parts of the U.S., with cars and trucks being transported to the effected regions."

Cox Automotive revised its August forecast of 16.6 million SAAR to 16.3 million, noting that between 20,000 and 40,000 new-vehicle sales could be delayed in Texas based on Harvey's impact so far. September is likely to register a mild boost in sales as a result.

"The process will likely last months, pushing higher sales in the region in Q4," read a statement from Cox Automotive's Smoke. "We are looking at impact to full-year SAAR; initial estimates indicate a potential net improvement on full-year sales once replacement sales pick up in earnest."

Since the storm came ashore, Dealer.com websites in the affected markets have experience an almost 40% drop in shopping activity compared to the previous weekends in August. Dealer.com, according to the Cox Automotive, powers more than 60% of dealer websites.

Houston ranks eighth in registered vehicles with 5.6 million units in operation — the market accounting for 2.3% of U.S. total sales, according to Cox Automotive estimates.

When Hurricane Sandy struck the Northeastern United States in October 2012, New York's designated market area (DMA) experienced a 49% increase in new-vehicle sales the following month. The sales spike lasted two months, according to Cox Automotive. The uptick was less dramatic for used vehicles, the firm noted. This was due to tight supply of recent new vehicles following the Great Recession, which limited the potential for used-vehicles to fill the need.

Pricing trends should follow suit. Cox noted that wholesale prices strengthened in the three months following Sandy.

The Houston designated market area, the seventh largest by population in the United States, claims a vehicle ownership rate of 94.4%. That's higher than New York's 71% ownership rate and the U.S. rate of 91%.

"Given what we know so far and recognizing that the effects of the flooding are still ongoing, Houston looks bad. Considering Katrina damage and Sandy damage, and comparing vehicles in operation in Houston, and taking into account vehicle dependency and what the damage in Houston looks like from the reporting, we estimated the range to between 300,000 and 500,000," Smoke said. "If Houston indeed lost 300,000 vehicles, it's sobering to note that the entire Houston DMA has seen 325,000 new-vehicle sales in the last 12 months."

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